DOI: 10.1007/s00199-003-0408-x Economic Theory 23, 941–948 (2004) Optimality of the competitive equilibrium in the Uzawa-Lucas model with sector-specific externalities ⋆ Manuel A. G ´ omez Faculty of Economics, University of A Coru˜ na, Campus de Elvi ˜ na, 15071 A Coru ˜ na, SPAIN (e-mail: mago@udc.es) Received: November 1, 2002; revised version: June 3, 2003 Summary. In this paper, we show that the competitive equilibrium is optimal in the Uzawa-Lucas model with sector-specific externalities associated to human capital in the goods sector. Thus, these external effects do not provoke a market failure and do not provide a rationale for government intervention. Keywords and Phrases: Endogenous growth, Externalities, Efficiency. JEL Classification Numbers: E62, H21, O41. 1 Introduction In the past decade, the Uzawa [13] and Lucas’ [9] model of endogenous growth driven by human capital accumulation has been the subject of active research. The possibility that the technology at the level of the aggregate economy may differ from the technology faced by an individual firm because of the presence of external effects has been considered by a number of authors, and is one of the rationales for government intervention. Lucas [9] considers the case where the average human capital has an external effect on the sector producing goods. Chamley [6] and Benhabib and Perli [5] consider the case where the sector producing human capital exhibits a positive external effect arising from the average learning time. Such externalities cause the fraction of time devoted to human capital accumulation be inferior to the optimal. This market failure may call for public intervention to correct it. In fact, Garc´ ıa-Castrillo and Sanso [7] and G´ omez [8] derive fiscal ⋆ I wish to thank Sandra L´ opez Calvo and an anonymous referee for their valuable comments. Financial support from the Spanish Ministry of Science and Technology and FEDER through Plan Nacional de Investigaci´ on Cient´ ıfica, Desarrollo e Innovaci´ on Tecnol´ ogica (I+D+I) Grant SEC2002- 03663 is gratefully acknowledged.